Was France at fault for The Great Depression?

<cite class="caption"> Reuters – File photo of people milling about outside of a bank during the Great Depression, 1933. REUTERS/Franklin … </cite>

<cite class="vcard"> </cite> – <abbr title="2010-10-29T04:40:16-0700" class="timedate">Fri Oct 29, 7:40 am ET</abbr>
LONDON (Reuters) – As if France didn't have enough problems at the moment with mass protests against pension reforms, now it stands accused of causing The Great Depression.
An academic paper published by the National Bureau of Economic Research suggests it may have been gold hoarding by France in the late 1920s that tipped the world into the economic abyss and not the oft-blamed tightening of U.S. monetary policy.
According to the paper, written by economist Douglas Irwin of Dartmouth College, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively "sterilized" it so as not to have a negative impact domestically.
Major currencies at the time were backed by gold under the Gold Standard system, so the move had the effect of creating an artificial shortage of reserves, putting other countries under enormous deflationary pressure.
Irwin tested his theory by looking to see what would have happened without the French move.
"Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously," he wrote.
He concludes that France was "somewhat more" to blame than the United States for the worldwide deflation of 1929-33 and that the deflation could have been avoided if central banks had simply maintained things as they were in 1928.
The research is available at The National Bureau of Economic Research

"The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin."

It seems like this build-up in France coinided with gold being illegal to own in the US. (?) It would be interesting to see how much other European countries increased holdings.

"...And this is the will of him who sent me, that I should lose nothing of all that he has given me, but raise it up on the last day. For this is the will of my Father, that everyone who looks on the Son and believes in him should have eternal life, and I will raise him up on the last day." John 6:39-40

Laying the fault for the Great Depression of the 1930’s at France’s doorstep, is a bit of an ask. Quite likely it may have been but one of a number of factors that may have contributed to the Great Depression. Distorting precious metals commodity markets risks the chance of unpredictable catastrophic effects, especially in stock markets. An example of this was during the late 1980’s when the Hunt Brothers tried to do some speculative price gouging by trying to, and nearly succeeding in, cornering the world silver market. As it happened the scheme blew up in their faces, and they paid heavily for their efforts….but a lot of innocents were harmed in the process. Without some adroit intervention by the US Government, banks would have toppled over, and undoubtedly the knock on effects would have harmed the US economy generally, and quite possibly the rest of the world.

Counterfactuals, looking with the benefit of hindsight may come up with any number of conclusions….fashionable or otherwise. The start of WWI has often been put at the feet of some no name anarchist assassins whacking some obscure minor royalty from some eminently insignificant country in Europe….but for a world war to have been given momentum, a large number of significant pre-conditions had to be in place before the House of cards that was European diplomacy, toppled towards war.

A sampling of some pre-conditions included among other things: deteriorating relationships between European Monarchies; nationalistic competitiveness and ambitions between European nations; an arms race between Britain, France and Germany; The confidence given to Kaiser Wilhelm, by the German General Staff that a war could be quickly winnable by agency of the “Schlieffen” Plan; and a set of alliances that instead of being circuit breakers, became accelerants to war.

These are but a few factors that I could think of off the top of my head, undoubtedly there were also a multitude of others; some major and some laughably minor. The point is, that although the assassination of Archduke Ferdinand in Sarajevo may have been the catalyst, all the other unstable ingredients had also to be in the keg for there to be a big BANG! I suspect that the same is quite probably true of the Wall Street Crash of 1929, and the ensuing Great Depression of the 1930’s.
<FONT face="Comic Sans MS"><FONT size=3><?xml:namespace prefix = o ns = "urn:schemas-microsoft-comhttp://en.wikipedia.org/wiki/Silver_Thursday

[FONT=border=]As you know, the Great Depression was exacerbated by the Fed shrinking the money supply, but the decrease in the money supply did not CAUSE the downturn. The downturn was already underway before the monetary contraction. Statistics show that industrial output was falling 6 months before the stock market crash. [/FONT]

Furthermore, the Fed was actively pursuing a deflationist policy, so if there was more money in circulation, it stands to reason that the “extra French” reserves would also have been sopped up by the Fed, thus placing the economy in exactly the same position that we actually found ourselves.

The problem with counterfactual regression analysis is that it assumes the behavior of the actors to be identical under different circumstances. The modelers only allow actions to change to the extent that they predetermine. Unsurprisingly, they get results that fit with their hypothesis.

So no the french didn't cause the Great Depression... (forgive the Stats speak but thats one of my areas...)

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Hi Quigly, I know that you have an almost clinical aversion to wiki, I included the wiki links mainly so that some people would know what the hell I was talking about. I can't assume that everyone enjoyed the secondary education that I did, regarding WWI: As to the silver bubble, I read quite a lot about that when it was happening...well before Wiki.

The point I was making was that complex systems usually don't fall over due to a single causal factor. Usually such failures occur due to a concatenation of factors that in total contribute to the failure.

It may be reasonable to consider France's holdings of gold as a possible contributing factor, but it is unreasonable to suppose that it was the only, or even the primary cause.

At the risk of gravely oversimplifying, most financial / economic bubbles burst eventually, and in the case of stockmarkets, when the bubble is huge, then the bust is commensurately huge. Stockmarkets trade in confidence as much as they do in commodities or in assets, and when confidence dives, investors panic like lemmings, and so the process goes, rapidly affecting other parts of the economy. It is interesting to note that the conditions at this time are not that dissimilar to the 1920's, but the world no longer relies on gold reserves to back up currencies....I guess when the next world crash and depression happens, France will be off the hook ; )

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